USD remains the safe haven of G10 FX and should remain supported against the backdrop of persistent market uncertainty over the Ukraine crisis. The war in Ukraine has further strengthened the perceived divergence between the hawkish Fed on the one hand and the dovish ECB on the other given the limited vulnerability of the US economy to Russian sanctions and the negative commodity terms of trade shock that resulted from the crisis. This has added to the rate appeal of the USD. That said, the US rates markets have already priced in a considerable amount of tightening especially in the near term, and this may limit the support for the USD. Moreover, there were no upside surprises from the US CPI yesterday and this corroborated the view that the Fed will deliver a 25bp hike next week. Today’s he US focus today will be on the US March Michigan consumer sentiment release. Presumably higher gasoline prices will be taking their toll here. Yet there are no signs of the Fed backing away from. All told, the USD could continue to take its cue from the resilience of broader risk sentiment with any renewed concerns about the Ukraine crisis likely to boost its safe-haven appeal.
USD/CAD has hovered around 1.28 in the past two sessions after rejecting 1.2900 levels earlier this week. The correction in oil prices is not taking a big toll on the loonie as it has been largely accompanied by a rebound in global risk sentiment, and crude continues to trade at levels that can further underpin the recovery in the Canadian energy industry. Today, February’s jobs data will be in focus in Canada, and markets expect a solid headline read (around 130k), in line with last week’s strong US numbers. Special attention will be on wage growth, which had corrected lower to 2.4% YoY in January.
A good jobs report today could help markets take a more convincing stance on a Bank of Canada rate hike in April, which is currently 60% priced in, and is starting to look increasingly likely given the positive spillover of high oil prices into the Canadian economy and inflation that looks unlikely to ease in the near term. This should pave the way for more USD/CAD downside – the pair could press 1.2700 today - although headlines related to the Russia-Ukraine conflict will continue to play a bigger role for the pair.
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